The change of "limited liability company" to "partnership" is a common structural arrangement for enterprises to implement equity incentives and build employee shareholding platform. Since November 2022, tax authorities in many places have been checking the failure to liquidate the "company to partnership" process. Recently, the news that an internet financial data service company faced a huge amount of back tax due to the failure to liquidate the tax in the change of organization form of its shareholding platform triggered the heated discussion on the compliance issue of "company to partnership" once again. The recent news of an Internet financial data service company facing a huge tax reimbursement for failing to clear the tax in the organizational form of its shareholding platform has once again triggered a heated debate on the compliance issue of "company to partnership". Does "company to partnership" require liquidation in business and taxation, and does the tax authority have the right to recover the unpaid tax in the process of change of organization form, and from whom should the tax authority recover the tax? This article will discuss and analyze the above issues for reference.

I. Practice Case: Limited Liability Company Converted to Partnership Without Tax Clearance, Facing Tax Inspection

On January 20, 2021, A Limited Liability Company moved from A City B to C City D, without registering the change of business and tax.On January 28, 2021, A Limited Liability Company's business type was changed from Limited Liability Company to Limited Partnership.On November 17, 2022, A Partnership received a Notice of Tax Matters, which stated that ".... Subject matter: to understand the basic situation of the taxpayer's production, operation and financial accounting; content of the notice:... The enterprise submits a tax clearance report for the conversion of organizational form..." . The original A limited liability company holds shares of the listed company and faces the risk of paying back VAT and surcharges, enterprise income tax and personal income tax in the link of organizational form change.

In practice, based on the consideration of utilizing the tax system and tax incentives of partnership enterprises, many enterprises have set up shareholding platforms in the form of "company to partnership". By adopting the principle of taxation after distribution, the partnership enterprise penetrates into the income tax levied on the partners of legal persons or natural persons, avoiding the double tax burden of levying corporate income tax on the company and individual income tax on the individuals under the form of legal person organization. On the other hand, prior to the issuance of the Announcement of the Ministry of Finance and the State Administration of Taxation on the Administration of Collection of Individual Income Taxes on Income from Equity Investments (Announcement No. 41 of the Ministry of Finance and the State Administration of Taxation of 2021), partnerships had the opportunity to apply the approved method of collection of income tax in order to reduce the tax burden.

In order to attract enterprises, some localities have introduced the simple measure of "company to partnership", whereby enterprises can directly change from a legal entity to a partnership. However, in recent years, in order to seriously financial discipline and accelerate the construction of a unified, open and competitive market system, the State Council has taken the lead in issuing a document to clean up and standardize the existing tax preferential policies ("Notice of the State Council on Cleaning up and Standardizing Preferential Policies on Taxation and Other Preferential Policies", Guofa [2014] No. 62), which includes "company to partnership" for equity investment enterprises. These include the clean-up and standardization of the "company to partnership" simplified measures for equity investment enterprises, which also triggered the tax dispute case of "enterprises converting their organizational form without liquidation and tax payment" in many places.

II. Focus of the case: industrial and commercial and tax treatment of the conversion of a limited company into a partnership

(I) Industry and commerce: "two steps" or "one step"?

At the industrial and commercial level, there is no clear legal basis for a "two-step" (i.e., canceling the original enterprise and then setting up a registered partnership) or "one-step" (i.e., changing the limited liability company directly into a partnership) to be taken for the conversion of a limited liability company into a partnership. After searching the reply of some regional business administration departments, the author found that, since limited liability company and partnership belong to two forms of business organization, applicable laws are different, most regional business administration departments believe that the change of organization form should be carried out in two-step way. But at the same time there are some special provisions, such as Xinjiang, Beijing Zhongguancun and other places in order to attract enterprises to land, the introduction of a limited company to change into a partnership "one step" easy to facilitate the policy.

1.Xinjiang: Qualified enterprises can directly change into a partnership

In order to cooperate with the national western development strategy, to attract equity investment enterprises in Xinjiang, Xinjiang since 2010 to introduce a series of policies to promote the development of equity investment enterprises, which involves the "company into a partnership" simple industrial and commercial procedures.

As can be seen from the above provisions, legal person enterprises meeting certain conditions can directly change their registration to partnership enterprises when moving into Xinjiang.In 2018, the People's Government of Xinjiang Uygur Autonomous Region issued the Notice on Effectively Doing a Good Job in Cleaning Up and Standardizing Matters Relating to Existing Preferential Policies on Taxation and Other Preferential Policies (XINGOVERNMENT OFFICE FEEDING [2018] No. 27) to clean up some of the existing preferential policies, and the aforementioned Provisional Measures have already been implemented and have expired. The aforementioned Interim Measures have expired, while No. 87 was withdrawn as it was "inconsistent with the relevant national tax policies and legislative principles".

2.Zhongguancun National Innovation Demonstration Zone: Limited Companies in the Zone Can Be Converted into Partnerships

According to the Opinions of the State Administration for Industry and Commerce on Supporting the Construction of National Innovation Demonstration Zone in Zhongguancun Science and Technology Park (工商办字[2009]200号), and Trial Measures for the Registration of Conversion of Enterprise Organizational Forms in the Zhongguancun National Innovation Demonstration Zone (京工商发[2010]131号), a limited liability company registered within the Zhongguancun National Innovation Demonstration Zone may be converted to a partnership, while enterprises outside the zone are required to apply for cancellation before applying for the establishment of a partnership. 

(II) Taxation: "Company into partnership" is deemed to be liquidated.

Article 4 of the Circular of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment of Enterprise Restructuring Businesses (Cai Shui [2009] No. 59, hereinafter referred to as "No. 59") stipulates that an enterprise transformed from a legal person into a sole proprietorship enterprise, a partnership and other unincorporated organizations shall be deemed to be an enterprise for liquidation and distribution, and the shareholders shall be deemed to have invested again in a new enterprise. re-investment to establish a new enterprise. According to the provisions of this article, the change of an enterprise from a legal person to a partnership shall be broken down into two steps: liquidation of the original legal person enterprise and reinvestment in the establishment of a partnership. Article 14 of the Trial Measures for the Registration of Conversion of Enterprise Organizational Forms in Zhongguancun National Innovation Demonstration Zone also specifies that a "company to partnership" shall settle all taxes of the original enterprise and carry out liquidation procedures. The Circular of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Handling of Enterprise Income Tax for Enterprise Liquidation Businesses (Cai Shui [2009] No. 60, hereinafter referred to as "Circular No. 60") further clarifies the calculation of taxes for the liquidation of enterprises.

(III) Risks of failure to settle tax in the case of a "company turned partnership

Under the new situation of tax collection and management, the convergence and connection of internal and external tax-related data of the tax system is one of the main elements of the "tax by numbers" reform. Since November 2022, based on the risk alerts of tax big data and the supervision of the General Administration of Taxation, tax authorities in many places have been checking the liquidation and tax payment situation of enterprises in the past years when they changed from a company to a partnership, which puts enterprises and individuals at the risk of paying back taxes.

In the opening case, on January 28, 2021, the predecessor of A Partnership, A Limited Liability Company, changed its organizational form from a limited company to a partnership, which, according to the provisions of Circular 59, should be treated as liquidation, distribution and re-investment in the establishment of a new enterprise, and faced with the risk of paying liquidation enterprise income and individual income tax, and also needed to pay VAT and surcharges due to distribution of assets as shares of listed companies. According to the relevant judicial interpretation of the Company Law, if there is a fault in the dissolution and liquidation of the enterprise, the debts during the period of existence of the enterprise shall be subject to the supplementary liability of the shareholders. Therefore, if there is a fault in the liquidation of the change of organizational form segment of Partnership A, the shareholders of A Limited will face the risk of assuming supplementary liability for the VAT and surcharges and EIT borne by the company.

The "Guidelines on Enterprise Write-off (Revised in 2021)" jointly issued by the General Administration of Market Supervision, the Ministry of Human Resources and Social Security, the Ministry of Commerce and the General Administration of Customs clearly states that enterprises are required to cancel their tax registration and enterprise registration respectively after completing liquidation, i.e., an enterprise should complete the tax registration for write-off before entering into the industrial and commercial write-off procedures. Before the launch and promotion of the Golden Tax System III, the degree of information connectivity between taxation and industry and commerce was relatively low, and there were cases where some enterprises handled industrial and commercial deregistration without completing tax liquidation. On the other hand, as mentioned above, some regions have "one-step" simplified procedures for "company to partnership", and enterprises can defend themselves on the basis of no fault and reliance interests in the process of conversion of organizational forms. That is, the enterprise in accordance with the then effective policy to change the form of organization, the original registration authority did not require the provision of liquidation report, and the enterprise did not misrepresentation, concealment and fraudulent changes in the form of simplified organization. Therefore, the enterprise has completed the industrial and commercial changes according to the legal procedures, which has generated the protection of reliance interests, and the tax authorities cannot carry out the retrospective law enforcement procedures without legal reasons and legal procedures.

III. Can the tax authorities recover the tax from the canceled enterprise?

According to the viewpoints of most local business administration departments and the provisions of Circular 59, the change of an enterprise from a limited liability company to a partnership should be regarded as liquidation, and the original enterprise should be canceled and then apply for the establishment of a partnership. If the enterprise has not liquidated the tax in the process of conversion, whether the tax authority has the right to recover the unpaid tax in the change of organizational form depends on whether the recovery period has passed, which involves the characterization of the enterprise in the change of organizational form without tax clearance; if the tax authority has the right to recover the tax, in the case of the original enterprise has been written off, which subject should be recovered, the practice of the tax authorities around the world is not the same, and there is a big In practice, the tax authorities in different places have different practices and there is a big controversy.

(I) Whether failure to complete tax clearance in the change of organizational form constitutes tax evasion

Article 52 of the Law on Administration of Tax Collection stipulates the time limit for recovery under different circumstances. If the taxpayer or withholding agent fails to pay the underpaid tax due to the responsibility of the tax authority, the tax authority may recover the tax within three years; if the taxpayer or withholding agent fails to pay the tax or underpays the tax due to the mistake of calculation, the tax authority may recover the tax and late payment within three years, and the tax authority may extend the period to five years under special circumstances; for tax evasion, tax resistance and tax fraud, the tax authority may recover the tax and late payment within three years; for tax evasion, tax resistance and tax fraud, the tax authority may recover the tax and late payment within five years. For tax evasion, tax resistance and tax fraud, there is no limitation on the period of recovery. For the situation of not clearing the tax in the change of organizational form, some regional tax authorities determine that it is the fault of the taxpayer and apply a five-year recovery period and levy late fees; while some regional tax authorities determine that the failure to clear the tax is tax evasion and apply an unlimited recovery period.

Article 63 of the Tax Collection and Management Law stipulates four circumstances constituting tax evasion, i.e., if the taxpayer forges, alters, conceals, or destroys the account books and account vouchers without authorization, or overstates the expenditures or omits to list or understates the income on the account books, or refuses to declare or makes false tax declaration after the notification of declaration by the tax authorities, and does not pay or underpays the tax payable. In the author's opinion, the change of organizational form does not belong to the above-listed cases, and the enterprise's failure to pay the tax in the process of "company to partnership" does not constitute tax evasion.

(II) To whom should the unpaid tax of a canceled enterprise be recovered?

During the recovery period, for the unpaid tax of the canceled enterprise, due to the ambiguity of the existing regulations, in practice, there are cases where the tax authorities recover the tax from the canceled enterprise, reinstate the tax registration of the enterprise, or recover the tax from the original shareholders or real controllers of the company.

Recovery of tax from a canceled enterprise: a canceled enterprise is not an eligible tax subject.

In practice, there are some areas where the tax authorities have recovered taxes from canceled enterprises. According to article 59 of the Civil Code, "The civil rights and civil behavioral capacity of a legal person shall arise from the establishment of the legal person and shall be extinguished when the legal person is terminated." Article 72, paragraph 3, states, "A legal person is terminated when liquidation is completed and the registration of the legal person's deregistration is accomplished." Article 30 of the Regulations on the Administration of Registration of Market Entities states, "A market entity is terminated upon deregistration by the registration authority." The deregistration of an enterprise's business registration means that the corporate personality of the company has been extinguished, and it no longer enjoys the capacity for civil, administrative, or criminal liability, and, in general, civil, administrative, and criminal activities involving the company shall be terminated. Enterprise legal person for liquidation procedures and the end of the business registration for cancellation, legal person qualification is eliminated, the subject of taxation also no longer exists, in the case of the subject of taxation does not exist, the tax authorities are still the subject of the cancellation of the enterprise to make processing decisions, administrative penalty decisions, in the law, this point of view in practice is also adopted by the court.

Shanxi Higher People's Court made (2017) Jin Xing Shen No. 379 Administrative Ruling clearly pointed out that "this court believes that the core dispute in this case is the question of whether or not there is an error in the subject of the processing decision being appealed to ...... The gas station was canceled by the business registration authority on August 13, 2015 registration. After the deregistration, the legal personality of the enterprise was completely eliminated, and it could no longer engage in any production and operation activities or bear any debts and liabilities in the name of the enterprise. Therefore, the Municipal Inspection Bureau's decision to deal with the deregistered Gas Station No. 2 lacks factual and legal basis."

To sum up, the enterprise in the conversion of the organizational form, its original limited liability company's legal personality is lost, as the main body of the responsibility of the legal status does not exist, the tax authorities of the original enterprise to recover taxes on the behavior of the law is not justified.

(III) Restoration of tax registration: there is no law that stipulates that the tax authorities can take the initiative to restore the tax registration of the canceled enterprise.

In practice, there are still some areas where the tax authorities require enterprises that have been registered for industrial and commercial deregistration to resume tax registration in order to recover taxes. In the author's view, the current laws and regulations do not give the tax authorities the power to reinstate the tax registration of enterprises. The Guidelines on Enterprise Deregistration (Revised in 2021) stipulate that if an enterprise conceals the true situation or makes false statements in the deregistration, the registration authority may revoke the deregistration according to the law. From the perspective of system interpretation, the "revocation of deregistration" here refers to the fact that the registration authority can revoke the industrial and commercial deregistration of an enterprise, rather than the tax authority can revoke the tax deregistration of an enterprise. Therefore, in accordance with the principle of tax law, the tax authorities have no right to require enterprises to resume tax registration.

As mentioned above, in principle, an enterprise that has been canceled through legal procedures should not be held liable by the tax authorities, but if there is "false liquidation", "malicious disposal of company property or concealment of assets", "liquidation without the law, with a However, if there is "false liquidation", "malicious disposal of company property or concealment of assets", "without liquidation in accordance with the law, with a false liquidation report to deceive the registration authority for deregistration" and other malicious use of the deregistration mechanism to avoid payment of taxes, the tax authorities can only be deregistered enterprises to start the audit procedure, and the premise should be made to revoke the deregistration to satisfy the subject of eligibility of the legal requirements before the audit process.

Recovery of taxes from original shareholders: shareholders can claim no fault in liquidation as a defense.

Some regional tax bureaus and courts believe that the actual controllers or shareholders of the company should recover the tax, but the object of such recovery is also unfounded in the law. 2015 "Tax Collection and Management Law (Draft for Public Comments)" added "If the company is dissolved and the tax is not paid, the shareholders of the original limited liability company, the controlling shareholders of the limited liability company, as well as the actual controllers of the company shall be liable for the unpaid tax to the extent of the amount of capital contribution. The draft of the Consultation Draft adds that "the shareholders of the original limited liability company, the controlling shareholders of the joint stock limited company, and the actual controller of the company shall be liable for the unpaid tax within the limit of the amount of capital contribution", but it has not been incorporated into the current tax law system.

In practice, some courts applied the relevant provisions of the Provisions of the Supreme People's Court on Several Issues on the Application of the Company Law (II) to recover taxes and late payment fees from shareholders and actual controllers of the enterprise prior to its deregistration. For example, Beijing No. 2 Intermediate People's Court rendered the judgment No. (2020) Jing 02 Xing Feng 1464, which indicated that "Article 19 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (II) (amended in 2014) provides that shareholders of a limited liability company, directors and controlling shareholders of a joint stock limited company, as well as the company's actual controllers who, after the dissolution of the company, maliciously dispose of the company's property causing losses to the creditors, or without liquidation in accordance with the law, fraudulently obtain the company registration authority to handle the deregistration of the legal person with a false liquidation report, and the creditors' claim that they are liable for the debts of the company, the people's court shall support it in accordance with the law. In this case, a company has registered for deregistration by providing false liquidation information, resulting in the non-existence of its legal subject status, but Ding, as the only shareholder of a company, should bear the corresponding legal responsibility for the tax loss caused to the state because a company cannot bear the responsibility of paying tax after deregistration, and the Beijing Tax Inspection Bureau will take Ding as the main body of the responsibility of recovering the tax ...... conforms to the provisions of the law." In the author's opinion, if the tax authorities based on the above judicial interpretation of the claim to recover taxes on shareholders, the shareholders should actively prove that they are not at fault in the liquidation process, such as the dissolution of the company in the process of the establishment of a liquidation group in accordance with the law, the liquidation group in accordance with the law to carry out the work of liquidation and production of the liquidation report, in accordance with the law will be submitted to the creditors of the tax authorities and creditors to obtain the approval of the meeting, and so on.